The good news is that more analysts have joined the fight, explaining that Europe is in trouble because of a failure to address the real problem of excessive government spending.

Here are some excerpts from a column in USA Today by Matthew Melchiorre from the Competitive Enterprise Institute, beginning with a good summary of how Europe has erred by choosing to impose austerity on the private sector.

The folly of “austerity” composed mainly of tax hikes with less in the way of spending reductions has driven the economies of the Old World into the ground. We’re next unless Congress keeps Uncle Sam out of Americans’ wallets and takes a chainsaw to Washington’s budget. …How is this likely to pan out? To get an idea, we can look at Europe, which has followed a similar strategy and has had little success in reviving growth. Spending cuts have been weak. Today, not a single Euro Zone government is spending less as a percentage of GDP than it did in 2007, according to Eurostat data. Tax increases, on the other hand, have been rampant. The average cyclically adjusted total tax burden among Euro Zone countries increased by about 5% from 2007 to 2010, according to European Commission data.

But there are some exceptions to the big-government consensus. Melchiorre notes that Estonia and other Baltic nations decided to impose genuine budget cuts.

Several Baltic countries have broken the European straitjacket of growth-strangling tax “austerity,” and have enjoyed success relative to their peers as a result. Take Estonia, for example. The Estonian government implemented an austerity program in 2009…cutting into public employee wages by 40% and slashing total government spending by a whopping 16% by 2011.

Estonia’s economy…bounced right back with 2 percent growth the following year and has since continued to prosper. For the past two years, Estonian industry has expanded more than twice as fast as that of Germany. …Tax increases don’t bring about prosperity. Shrinking government to live within its means does.

Amen to that, but I think the final point needs to be expanded. It’s not just that tax increases don’t work. It’s that they make matters worse.

The problem in most nations is that government is too big. In a best-case scenario, tax increases are a substitute for spending restraint. More often than not, though, tax hikes lead to higher levels of government spending.

This brings us back to the current fiscal fight in the United States. Obama has dug in his heels and demanded an increase in the top tax rates. He claims that this class-warfare approach is necessary for fiscal responsibility.

But ask yourself a question. We know that America’s long-run fiscal problem is entitlement spending. Will politicians be more likely or less likely to reform those programs if they think tax increases are an option?

If you answered “more likely,” you should move to Greece and see how well your system is working.

11 Responses

“Obama has dug in his heels and demanded an increase in the top tax rates.”

What I’d like is for any statist or liberal to explain to me how an extra 80 billion per year is going to help bring down our 1 trillion dollar deficits. (Of course, we’re likely to get much less than 80 billion more per year by raising tax rates, but we’ll give them the rosy number.)

How can anybody with half a brain look at our federal government and not realize we have a serious spending problem!?! Is basic math education that poor in our country?

They’ll vote to put light bulbs to shine energy on their solar panels. While the light bulb will be wired to take electricity right from the solar panel it shines on! Brilliant! If there’s political will, if there’s majoritarian support, then there’s a way. Look Al (Gore) free energy! OK It did not quite work the first few times but that was bad technical execution. As we put enough investment/effort and political will into light bulb and solar panel research, it WILL eventually work. There is hope. The lure of free energy is so great that it HAS to work in the end.

That is essentially what Europe is doing by taking energy from the private sector and feeding it to the public sector in hopes that that will feed back (with a multiplier [ha,ha]) into the private sector. No, not at this operational point on the Rahn Curve folks. Way past the peak, especially Europe. But, as in the energy example above, hope lives on – and inevitably, decline is accelerating. The few pundits who are starting to realize the delusion are way behind the curve of reality: the irreversible decline embodied in the entrenched collectivist hope of the European ninety percent. The ECB, Bernanke et al., and of course majoritarian politicians, are coming up with their next circuit design on how to produce free energy or, in economics, prosperity through flatter effort reward curves: Taking ever more from the still exceptionally competent, to insulate the majority from the consequences of mediocrity. Taxing exceptionalism to prop up mediocrity. How’s that as a prosperity strategy? Everyone will go down – drowned by a three billion rising sea of once collectively moribund Emerging World souls. As I keep saying to the blind: The three billion awakening souls of the Emerging World have neither the time not the patience to see how the western world’s experiment with flatter effort-reward curves turns out. Even the western world stars (such as the US) were already losing ground at a three percent annual growth rate trend line. Imagine what will happen under the hope of flatter effort-reward curves. What you see as various paths to destruction is just different facets and manifestations of this tectonic world shift. The three billion strong emerging world is rising, while the less than one billion western world lemmings have pinned their hopes on adoption of the very policies of statism that once kept three billion third world souls under production anesthesia. No more. Convergence will come soon. No its not your children’s problem,… in historical terms it’s just around the corner folks! The American middle class – for decades in the top fifteen percent of world prosperity – wants to claw back a few lost percentage points (talking about planetary greed!) – by declaring war against those in the western world who can still produce orders of magnitude more than the world average. The American middle class will predictably find itself converging towards the average. The world prosperity average that is.

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So what are we celebrating this Thanksgiving in America? The fact that America is finally converging to the Europe freedom loving people once escaped from. As a European immigrant, I’m thrilled!

It’s not just the Federal Government that’s needing reigning back, it’s the States coddling an immigrant population which is strangling growth. That the illegals get to have jobs has to be enough for them because they are not real citizens. Allowing ownership of American jobs only, States should disallow access to social programs like state food programs and General Relief, The Feds also restrict access to food stamps and AFDC.